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Fiorina Responds to Compensation Charges

Three weeks before shareholders are due to vote for or against Hewlett-Packard Co.'s pro-posed acquisition of Compaq Computer Corp., the war of words between HP Chairman Carly Fiorina and leading opponent of the deal, Walter Hewlett, is intensifying.

Three weeks before shareholders are due to vote for or against Hewlett-Packard Co.s pro-posed acquisition of Compaq Computer Corp., the war of words between HP Chairman Carly Fiorina and leading opponent of the deal, Walter Hewlett, is intensifying.

According to reports in the Wall Street Journal and New York Times, Walter Hewlett, an HP board member and son of company founder, Bill Hewlett, announced Fiorina and Compaqs Chairman, Michael Capellas, have in place a compensation package worth $115 million if the deal goes through. Furthermore, according to the papers, Hewlett said in a Securities and Exchange Commission filing yesterday that the package was discussed at HP board meetings before the acquisition was announced in September.

But at HPs February securities analysts briefing in New York Wednesday morning, Fiorina discounted the allegations.

"The opposition claimed we were misleading shareowners on the subject of compensation," she said. "Let me be very clear, shareowners have every right to know all of the details of compensa-tion of our senior managers but most particularly of the CEO of HP, of the CEO of Compaq. But we cannot disclose what has not been decided. We cannot disclose employment contracts which do not exist.

Further reading

"The compensation committee of the HP board decided rightly that this was a matter that the new compensation committee of the new board needed to take up," she added. "Why? Because that new compensation committee needs to consider the most recent market data to ensure that executives are paid at appropriate market rates, not above."

Fiorina, while not outright denying Hewletts claims of post-merger compensation discussions, characterized the reports as only the latest in a series of distractions made by "the opposition."

That opposition, however, is having a serious impact on HPs acquisition effort. Indeed, Fiorina used the majority of her time this morning to explain the benefits of the acquisition to Wall Street in hopes of keeping securities analysts focused.

As such, she touched on several fundamental HP businesses that stand to gain the most from the purchase of Compaq: the PC, enterprise computing and services businesses.

She began her discussion about the PC business saying spinning off its PC group would only be done if it could be a "viable business."

"A viable PC business for us means capitalizing on HPs very successful consumer PC business," she said. "This is a profitable business. A fastest growing in the market business…we want to capitalize on that consumer PC business and add from Compaq what we dont have: A competitive commercial business with a direct distribution capability."

For its fiscal first quarter of 2002, ended Jan. 31, HP reported a net loss of $4 million for its Embedded and Personal Systems business, compared to a net loss of $66 million for the same period a year ago.

And it should be noted that HP only began breaking out PCs under this division late last year. Up until then, PCs fell under the companys Computing Systems group, where losses have been more severe. While still part of that division, Computing Systems reported a net loss of $188 million for its fiscal fourth quarter 2001, and net loss of $450 million for the year.

With the PC business splintered off for the first time, the Computing Systems group posted a loss of $160 million for the first quarter.

For enterprise computing, Fiorina pointed to Compaqs prowess in NT, Linux and storage as key attributes.

"NT and Linux will grow at 20 plus and 30 plus percent, respectively, going forward," she said. "Do we sit these markets out? Or do we with Compaq become number one in high end in Unix in Linux and in NT. Do we capitalize on the storage market by combining with the number one player? Do we double the size of our sales force. Do we broaden our installed base?

"In other words," she continued, "in a consolidating industry do we ensure our enterprise computing business has the scale to truly be a platform of choice for customers and for partners. Or do we allow it to remain subscale and slowly whither?"

Fiorina was most emphatic about the benefits of Compaqs huge services business.

"Compaq brings us a $7 billion 14 percent operating margins services business," she said. "They bring us a $7 billion storage business that leads in the fastest growing piece of the market."